Best of the Week
Most Popular
1. Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - Nadeem_Walayat
2.Gold Price Focusing on May Cycle Bottom - Jim_Curry
3.Silver, silver, and silver! There’s More Than Silver, People! - P_Radomski_CFA
4.Is the Malaysian Economy a Potemkin Village - Sam_Chee_Kong
5.Stock Market Study Shows Why You Shouldn’t “Sell in May and Go Away” - Troy_Bombardia
6.A Big Stock Market Shock is About to Start - Martin C
7.A Long Term Gold Very Unpopular View - Rambus_Chartology
8.Stock Market “Sell in May and go away” Study When Stocks Are Down YTD - Troy_Bombardia
9.Global Currency RESET Challenge: Ultimate Twist - Jim_Willie_CB
10.The Coming Silver Supply Crunch Is Worse Than You Know - Jeff Clark
Last 7 days
Stock Market Ideal Cycle Low Near - 21st May 18
5 Effects Of Currency Fluctuations On The Economy - 21st May 18
Financial Conditions are Still too Easy for the Stocks Bull Market to End - 21st May 18
US Stock Market Elliott Wave Predictions for 2018 and Beyond - 20th May 18
Are You Still Fearful of Cryptos? - 20th May 18
US Stocks - Why I am Short-term Bearish, Medium-term Bullish - 20th May 18
Looking for a Turn in Gold Price - 20th May 18
GDX Gold Mining Stock Fundamentals 2018 - 19th May 18
Semiconductor Stock Market Canaries: Chirp, Warble… Soon a Croak and Silence? - 19th May 18
Three Drivers of Gold Price - 18th May 18
Gold Market in First Tertile of 2018 - 18th May 18
What Happens Next When Small Cap (Russell) Leads the Stock Market - 17th May 18
Negative Signs for EUR/USD? AUD/USD - Battle - 17th May 18
DOW Jones and CRUDE Oil on a Cliff Edge, Waiting for a Nudge! - 17th May 18
Gold Price No More Subtleness – It’s Show Time! - 17th May 18
VIX Cycles Point to Stock Market Correction - 17th May 18
Trump Sounds End Times Armageddon Trumpet for Jerusalem, Israel Evangelical Prophecies - 16th May 18
Our Next Stock Market Dow Fibonacci Price Targets – Get Ready! - 16th May 18
The Coming Copper Crunch - 16th May 18
Stock Futures Are on a Sell Signal - 16th May 18
What to do When the IRS Comes for Your Property - 16th May 18
IS BITCOIN ANONYMOUS? - 16th May 18
Bitcoin Tide Might Have Turned - 15th May 18
UK Online Gambling Market Grows According to UKGC - 15th May 18
Stock Market Study: What Happens Next when Dow Goes Up 8 Days in a Row - 15th May 18
Fibonacci Price Ladder Points to Higher Stock Prices - 15th May 18
U.S. Dollar Rally Is Doomed - 14th May 18
Gloomy Scenarios for the Fed That Should Boost Precious Metals - 14th May 18
US Dollar One Reversal Too Many - 14th May 18
SPX futures are higher, but so is VIX - 14th May 18
Precious Metals and Miners NUGT – The Sleeping Giant Trade - 14th May 18
Is This The Netflix Of Cannabis? - 14th May 18
US Quest for Iran Regime Change: Will EU Sustain the Nuclear Deal - 14th May 18
Stocks Bears Last Stand - 14th May 18

Market Oracle FREE Newsletter

Trading Lessons

GDP Growth Statistical Nonsense, The Unseen Hand

Politics / Economic Statistics Aug 06, 2012 - 02:54 AM GMT

By: Alasdair_Macleod

Politics

The assessment of economic growth based on Gross Domestic Product is a fallacy, because GDP is merely a measure of the amount of money in an economy. The one thing it does not measure, which is central to economic progress (note progress, not growth), is the level of entrepreneurial activity. This has important implications for the efficacy of government interventions and solutions to the current economic crisis.


I have written about GDP before, but to refresh the reader’s memory, GDP is basically the sum total of recorded business activity at the consumption level plus government spending expressed in money terms. If the government spends more, GDP rises; give more money to consumers, GDP rises; give more bank credit to consumers or business, GDP rises. Cut government spending, GDP falls. This is not contentious and has nothing to do with economic progress. Importantly, it excludes future entrepreneurial activity, except to the extent that an entrepreneur has actually spent some money putting his future plans into action. The obsession with GDP means that entrepreneurial activity, which is Adam Smith’s unseen hand that guides our future, is invisible to economic planners.

If that was the only consequence of confusing a money quantity with economic progress the results would not be so serious. Instead, misleading statistics such as GDP are leading all governments into bad policy decisions, and their choice has narrowed down to either ever-greater reflationary attempts to pump up GDP, or alternatively facing a collapse in the GDP number as bank credit contracts. The situation facing the eurozone already precludes any compromise between these extremes, while other nations believe they can print their way out of this difficulty.

The twin errors of misunderstanding GDP are the failure to see that monetary inflation is concealing a deepening economic depression, and it encourages policies that destroy entrepreneurial activity, or economic progress itself. This is a deadly combination, the equivalent of being in a hole and continuing to dig.

We cannot expect politicians to stop digging deeper and faster when their economic advisors are calling for more shovels. All politicians are fully committed to the fallacies that result from confusing GDP with economic progress. They pursue economic policies that are the equivalent of eating their own children. The children being eaten are savers, increasingly raided to sustain the status quo: savers whose savings are a precondition for entrepreneurial activity, and without which increasing numbers of us become reliant on the state.

There can be little hope that this lunacy will be abandoned while statistical nonsense such as GDP growth persists. The underlying economic depression, evidenced by high levels of unemployment, is symptomatic of economies burdened by misallocated resources. The solution is to do exactly the opposite of actions currently being pursued. To quote Calvin Coolidge: “Perhaps one of the most important accomplishments of my administration has been minding my own business. Government shouldn't play a part in everyday life."

It is still possible to do this. What is required in our leaders is a sound understanding of economics instead of belief-based neoclassicism. Thus armed, a politician should be able to explain the proper course of action to the reasonable majority, and implement it with their support.

Alasdair Macleod runs FinanceAndEconomics.org, a website dedicated to sound money and demystifying finance and economics. Alasdair has a background as a stockbroker, banker and economist. He is also a contributor to GoldMoney - The best way to buy gold online.

© 2012 Copyright Alasdair Macleod - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules